Revisiting the Beginning of the End

With the crystal clear clarity of hindsight, we bring you highlights (lowlights?) from the week that was in late June 2007, the week which, in our minds, officially kicked off the "sub-prime" mortgage loan crisis.

Unofficially, anecdotally, the beginning of the end most likely occurred in mid-February 2007, when Blackstone co-founder, CEO and Master of the Universe Stephen Schwarzman gave himself a "let-them-eat-cake" 60th birthday party in New York, featuring performances by Rod Stewart and Patti LaBelle for the 500 or so guests and rumored to have cost anywhere from $3million to $10+ million. (More on that, below...)

In early 2007, we didn't know it at the time (well some of us did: Paul Volcker, Nouriel Roubini, Bill Bonner, Mike Shedlock, Eric Janzsen, Doug Nolan, Yves Smith, Peter Schiff, Calculated Risk and Tanta, and Barry Ritholtz to name but a few), but the mid-year implosion of two Bear Stearns RMBS hedge funds the the lit fuse which since has detonated a global liquidity/credit/deleveraging/solvency crisis of biblical proportion now measured in trillions of dollars.

But back to late June 2007, "the week that was" to revisit the official beginning of the end.

On Wednesday, June 20, 2007, Merrill Lynch seized about $800 million of assets from the two funds and sold a sufficient amount to cover its loan exposure, prompting Bear Stearns to buy back assets and set up a $1.6 billion loan to the two hedge funds to avoid further public sales - and pricing - of the troubled assets.

In the same week, on Friday June 22, 2007, Masters of the Universe Stephen Schwarzman, Peter Peterson, et al, of Blackstone Group took advantage of the greater fool theory and brought their private equity group public at $31/share, offering 133 million shares and raising more than $4 billion plus another $3 billion from a Chinese Sovereign Wealth Fund, and briefly valuing the firm close to $8 billion.

At Friday's (11/07/08) closing price of $7.51/share, Blackstone Group's (Symbol: BX)market capitalization hovers around a quarter of its IPO valuation at under $2 billion.

From CNNMoney.com on June 20 2007:

Merrill Lynch has seized about $800 million of assets from troubled hedge funds managed by Bear Stearns, throwing in doubt the chances that the funds will survive.

By late Wednesday, Merrill Lynch had sold enough of the assets, which were used as collateral for loans made to the two funds, to cover its exposure to the ailing funds, the news agency Reuters reported.

Efforts by Bear Stearns to rescue two hedge funds hit by bad bets on subprime loans appear to be faltering.

The assets were were mainly bonds backed by other securities. More asset sales are expected Thursday.

And from the New York Times on July 18, 2007:

The drama surrounding the two funds began in May when investors in the more leveraged hedge fund were told losses through the end of April totaled 23 percent, not 10 percent as they had been told earlier. As securities markets declined, even the more conservative fund registered losses starting in March.

Investors tried to get out of the funds, but in May, Bear Stearns halted redemptions. Shortly after that, several banks and brokerage firms that had provided loans began demanding more cash as collateral. On June 26, Bear Stearns said it would offer a $1.6 billion loan to shore up the more conservative fund and unwind its positions.

In yesterday’s letter to clients, Bear Stearns said that some $1.4 billion of the loan remains untapped.

While risky mortgages are thought to have been central to the funds’ misfortunes, Bear’s letter said that “unprecedented declines in the valuations of a number of highly rated (AA and AAA) securities” contributed to June’s woeful performance.

The more conservative of the two Bear Stearns funds was the older; established three years ago, it generated monthly gains of roughly 1 percent to 1.5 percent until March. Bear Stearns started the more leveraged fund last summer, just as the mania for mortgage securities was topping out. At their peak, the funds were valued at $16 billion, including the leverage that they used.

The announcement that the funds are now almost worthless came as a surprise to many on Wall Street. “How did you go from reporting very high returns to suddenly now saying the collateral is worth nothing?” asked Janet Tavakoli, president of Tavakoli Structured Finance, a research firm in Chicago.

And Blackstone's Mr. Schwarzman, whose declining net worth now makes him eligible only for "Master of the Solar System" status? He now "regrets" the February 2007 birthday bacchanalia (or, perhaps, regrets more the publicity surrounding his birthday largesse).

From the October 31, 2008 New York Post:

Wall Street master of the universe solar system Stephen Schwarzman might be a man with few regrets, but even he has now admitted what everyone else on Wall Street already knew: His lavish 60th birthday party in 2007 was a bit over the top.

"Obviously, I wouldn't have wanted to do that and become, you know, some kind of symbol of sorts of that period of time," Schwarzman lamented yesterday at a conference in New York. "Who would ever wish that on themselves? No one."

Though well known in financial circles, Schwarzman, CEO of buyout titan Blackstone Group, came to symbolize Wall Street's excess after he spent $3 million hosting a swanky 60th birthday party for himself at the Park Avenue Armory in February 2007.

The soirée attracted lots of bold-face names among the 500 attendees, including finance's heavy hitters and entertainers like Patti LaBelle and Rod Stewart, who provided live entertainment.

It also eventually garnered Schwarzman considerable grief as many began to view the party as the beginning of the end of Wall Street's gilded age.

Indeed, the birthday celebration, followed a few months later by his $8 billion jackpot from Blackstone's initial public offering, and stories about a posh lifestyle that included costly crustaceans, transformed Schwarzman from a Wall Street king into what one magazine called a "poster child for greed." (All emphasis ours.)

What a week that was in late June 2007, the official beginning of the end, and a mid-February birthday bash which marks the unofficial beginning of the end.

All we need to know now is: If the first six months of 2007 were the beginning of the end, are we now at the "end of the beginning" of the global liquidity/credit/deleveraging/solvency crisis of biblical proportion now measured in trillions of dollars? Time will tell.